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Why and How to Build Your Credit Score in Your 20s

An important aspect of becoming financially independent as an adult is managing credit and your credit report, which will affect you throughout your life. A strong credit report (also known as a credit score or rating) significantly increases the ability to get credit cards and loans, and can affect the amount of interest that will be part of your loan payment; with a high credit rating it may be possible to get a lower interest rate on a home or car loan. Generally, a lower interest rate results in a lower monthly payment, saving you money over the life of the loan.

The three primary consumer credit reporting agencies that provide personal credit ratings are Atlanta-based Equifax®, Experian and TransUnion®. Each of these agencies receive personal financial data on consumers from credit card companies, banks (and similar financial institutions), lenders, and from public government sources, such as real estate property or court records. The data is collected and evaluated by software to generate a numerical score, a number that summarizes how well you manage financial responsibilities. As with most sports, a higher score is better.

After leaving school and starting a career, it's likely that some (or most) of your financial actions will be tracked and shared with credit reporting agencies. Building a strong credit score will literally pay benefits at any age, and here's some advice for getting and maintaining a winning rating.

Get a lower interest rate, low (or no) annual fee credit card, and use your credit card well below its allowed credit limit

A credit card is part of the foundation for building credit and a strong credit rating. When you are looking for your first credit card and comparing offerings, look for cards with lower interest rates on balances, and for cards with a low annual fee, or, even better, no annual fee.

The recommendations from credit reporting agencies are that you should try to keep your usage below 30% of your credit limit, whether for an individual card or for all your cards, to earn a higher credit score. This limited use of the credit card highlights to the credit agencies that you are disciplined in your spending and able to manage your personal debt. As an example of a voluntary 30% credit usage restriction, if your card’s credit limit is $10,000, then you would try to only use approximately $3,000 in credit before paying off that charge balance.

Pay all your bills on time and in full

This is extremely important to building credit and having a good credit score and, yes, it could be considered to common sense—pay all your bills, in full, and on time, with no exceptions, unless there are some special circumstances involved. Bills always have a due date and, often, required minimum payments clearly noted on them. A regular record of on-time bill payments is the single best activity for building and maintaining good credit at any time of your life. If you cannot pay a bill in full, then pay the required minimum amount.

Also have your name on the lease if you';re renting, or on a mortgage if you're buying a home—and try to stay in your new place for a while

Paying rent or a mortgage on time is important for building credit, and credit agencies also like to see people who don't change residences often. People who own and maintain the same home for several years are generally rated as more trustworthy credit users than renters who move around frequently.

Have your name listed for public utility and other service bills

Again, it’s essential to create an available record of consistently paying bills. Have natural gas, electricity, water, internet, and cellular service bills in your name as the payer of record.

Put your name on a car loan

Paying off a car loan is evidence of prudent financial management, and, probably, regular income, which are two fiscal factors credit rating agencies consider in your credit score.

Keep working to demonstrate a history of ongoing employment

Having a long-term, ongoing job is a strong indicator of being able to take on and pay back debt and strengthens your creditworthiness.

Pay off your loans, including paying off college student loan debt

Paying your mortgage, credit card balance and car loan on time and fully all count towards creating a good credit report, as does paying down college tuition loans. If you can’t pay the full amount, pay what you can. Consider that another loan—a lower interest personal loan—can save you money every month if you use it to consolidate and pay off higher-interest loans.

Regularly monitor your credit score for free

The best way to evaluate your credit status is to regularly get an official credit report. Americans are entitled to one free copy of their credit report every 12 months from each of the three nationwide credit reporting agencies mentioned above—Equifax, Experian,and TransUnion. The credit reports may be ordered online from annualcreditreport.com (which is the only federally authorized website that provides free credit reports) or by calling 1-877-322-8228. To get a free report you must provide some personal information—such as your name, address, Social Security number, and date of birth—to verify your identity.

What else should I know?

For more information that may help you manage your finances at any age, look into the free Delta Community Financial Education Center webinars on a range of practical financial topics. Please visit the Financial Education Center's Events & Seminars page to register for its on-demand webinars.

There are more than 10 years of Delta Community blogs that might help in managing personal finances, and here are some of them: